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Before you make any investment in Pixar Studio, as a risk-averse investor, you have to detailed-analyze Pixar’s securities. There are 2 options of the securities, bond and stock. For today, the bond market price is $1,089/share and the stock market price currently sells at $22.55/share. Bond: Pixar has just issued a 10-year, 14% coupon interest rate, $1,000-par bond that pays interest annually. Your required return is 12% currently. a. Calculate the bond value (B0). b. Regarding to your answer in a, what is the bond status (discount/par/premium)? Why? Stock: First Data Pixar most recent (2010) annual dividend payment was $1.95 per share. You estimate that these dividends will increase at a 2.75% annual rate over the next 3 years (2011 – 2013). At the end of the 3 years, you believe that Pixar would grow more because of the new technology of animation, resulting an increase in dividend growth rate to 4.5% per year, for the foreseeable future. You need 12% as the required return. c. Calculate the P0 (P2010). Second Data The firm’s weighted average cost of capital is 8.25%, and it has $3,500,000 of debt at market value and $800,000 of preferred stock at its assumed market value. The estimated free cash flows over the next 5 years, 2011 through 2015, are given below. Beyond 2015 to infinity, the firm expects its free cash flow to grow by 3.35% annually.
Free Cash Flow Year FCF 2011 $450,000 2012 $555,000 2013 $875,000 2014 $930,000 2015 $1,150,000
d. Estimate the value of Pixar Animation Studio’s entire company (Vc) by using the free cash flow valuation model. e. Use your finding in part d, along with data provided above, to find Pixar’s common stock value (Vs). f. Pixar has 600,000 shares of common stock outstanding. Estimate Pixar’s common stock value per share. g. What is your final decision regarding to Pixar’s securities? Would you be an Pixar’s next investor? In what securities? State your reason (relate it with under/overvalue and your estimation of Pixar’s future). 2.
Salvatore is considering to buy stocks. His consultant picked a company’s stock and bond for him.
25. it expects 8% growth. If the market price of stock is $17. for 3 years later. and then it would become constants with 5% growth per year forever. if he wants 13% of required return? . It will mature in 15 years. the coupon interest rate is 8.000 par value. The history and expectation for this stock: Last year the company paid a dividend of $2. what is your recommendation for Salvatore. The company’s bond has $1. what is your recommendation for Salvatore. If the market price of bond is $790 per share today.a.5% growth.5 per share today.5%. if he wants 18% of required return? b. for 2 years after that. it expects 6.